Missed a mortgage payment? Here are next steps you should take

Amid a series of interest rate hikes implemented by the Bank of Canada over the last few months, some Canadian homeowners may be concerned about whether they’ll be able to keep up with their mortgage payments.

Missed mortgage payments, otherwise known as mortgage delinquency, isn’t common in Canada, according to data compiled by the Canada Mortgage and Housing Corporation (CMHC). In the first quarter of 2022, the country’s mortgage delinquency rate was 0.18 per cent, down from 0.38 per cent in 2012.

Still, for those who may be likely to miss an upcoming mortgage payment, or are already past their due date, there are steps that can be taken to mitigate the situation, said Leah Zlatkin, a mortgage broker with Mortgage Outlet Inc., based in Toronto.

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The first step involves being proactive and transparent by letting mortgage lenders know about the possibility of missing an upcoming payment, she said.

“The first thing you should do is call your lender,” Zlatkin told CTVNews.ca in a telephone interview on Wednesday. “It’s easier to ask for permission than it is to ask for forgiveness in this case … Reach out to your lender and let them know [there’s] a problem.”

While homeowners may be expected to pay a penalty for missed mortgage payments, lenders will usually try to cooperate with borrowers to find a solution, said Scott Terrio, a manager of consumer insolvency at Hoyes, Michalos & Associates Inc., based in Toronto.

“Banks don’t want to be homeowners,” Terrio told CTVNews.ca in a telephone interview on Wednesday. “They’ll often work with you to get current [on your mortgage payments].”

Once the due date for a mortgage payment has passed, lenders will often contact homeowners via mail, phone or through their online portal to notify them of the missed payment. At that point, homeowners should call their lenders right away to discuss next steps, said Zlatkin. Different lenders have different programs that may be able to help clients manage their mortgage payments, Terrio said.

“You’re trying to buy yourself a bit of time … and a payment plan,” he said.

DETERMINE IF THE ISSUE IS SHORT OR LONG TERM

The next step is to determine whether the reason for missing a mortgage payment stems from a short-term issue, or one that will affect a person’s income for the unforeseeable future, such as losing a job, Zlatkin said. Missing a mortgage payment is often result of a cash flow problem, Terrio said, where net household income is not enough to cover monthly expenses, including mortgage payments.

If the problem is short term, it may be worth exploring the idea of a mortgage deferral, where payments are delayed for a specific period of time, Zlatkin said. Some banks also offer mortgage payment vacation programs, which allow borrowers to make larger payments in advance or pay a little more each month in order to take time off from paying their mortgage in the future. This can be helpful for those who suspect it may be difficult to make their mortgage payments in the months to come, Zlatkin said.

Another option to consider involves putting off other payments if it means being able to meet your monthly mortgage obligations, Terrio said.

“What you should be doing is missing every [other loan payment] first,” he said. “Your least risky thing is to skip your next visa payment if that will help you get current on your mortgage payment.”

If the problem is one that will affect mortgage payments in the long term, perhaps extending the mortgage’s amortization rate is the best option, Zlatkin said. This would give homeowners the ability to make lower mortgage payments across more time. Banks can also allow borrowers to restructure or consolidate their debt payments using a single loan, which can help relieve some of the stress around remembering to make large payments each month.

“There’s the potential to … consolidate all of your debt together into one payment every month rather than paying all these different payment amounts that are potentially going to be at higher interest rates,” Zlatkin said.

If missed mortgage payments are a recurring issue, lenders can take legal action, Terrio said. This may result in foreclosure or power of sale, both of which involve losing ownership over a home. Speaking to an expert about managing mortgage payments in advance can help homeowners explore their options and avoid losing their home, Zlatkin said.

“If you let it go, it’s like an untreated wound – it festers and it becomes worse,” she said.

“It’s a lot easier to prevent bad moves being made if someone can advise you on what those bad moves might be, than it is to undo them,” Terrio said.

DOES MISSING A MORTGAGE PAYMENT AFFECT YOUR CREDIT SCORE?

Lenders will keep their own records of missed payments and often report them to credit bureaus, such as TransUnion Canada and Equifax Canada, Zlatkin said. As a result, missing a mortgage payment will have a negative impact on a person’s credit score, said Graeme Moss, founder of Fair Mortgage Solutions, based in Hamilton, Ont.

“Your credit rating is like a financial passport, so when [lenders] see that number, it indicates how reliable you are,” Moss told CTVNews.ca in a telephone interview on Tuesday. “Your credit score could really take a hit if there were multiple [late payments].”

Records of missed payments will remain on a person’s credit report for seven years. While it is possible for someone to improve their credit score over time, even one missed mortgage payment can lower their credit worthiness, Terrio said. As a result, lenders may not be able to offer as good an interest rate, said Zlatkin.

“If somebody thinks that you may not pay them back, they're going to charge you a little bit more interest in order to hedge their bet against the fact that you may default later on,” she said.

Adding pressure to cash flows of many Canadian households are rising interest and inflation rates, Terrio said. He noted his company has seen an increase in the number of new clients expressing such concerns.

“Your income may be the same, but if everything's costing more, then you could miss a mortgage payment,” said Terrio. “Inflation is enough to derail the ability to pay a mortgage.”

Based on a recent survey conducted by Manulife Bank, nearly one in four homeowners said they may not be able to afford their home if interest rates continue to increase.

For those concerned about meeting their monthly payment requirements, Moss recommends assessing their total debt-to-income ratio -- the percentage of gross monthly income that goes towards paying monthly debt. This can be done by adding up debt payments such as mortgage payments, credit card bills and any other loan payments made each month.

Then, divide this number by the total amount of money earned each month before taxes and other deductions, and multiply by 100. A 50 per cent debt-to-income ratio should be considered the absolute maximum, Moss said.

“Generally, if [that percentage] is above 50, there’s got to be some sort of corrective action,” said Moss.

At that point, he suggests looking at options to restructure debt payments, and making adjustments to spending to reduce the ratio.